RSPT Spells Capital Flight

The debate over the Resources Super Profits Tax (RSPT) has been raging for some time now, since announced by the government upon release of the Henry Review on 2 May. Proponents of the tax say it is based on sound theory and will provide Australia with a fairer share of wealth generated from its resources. Opponents say it has so fundamentally changed the ground rules for the resource industry that the issue of sovereign risk is now a real one, as David Murray, Chairman of the Future Fund, recently highlighted.

As our comments in last month’s Perspectives indicated, we belong with the latter group. This tax is flawed in so many aspects ranging from its ideological foundation, through its complexity, to its key tenets such as what constitutes a super profit.

We make the simple observation that a government cannot take up to $12 billion dollars annually (by their estimate) out of an industry and expect it to operate on a business-as-usual basis. If this tax proceeds, every new project and every expansion of an existing project must now be re-evaluated to see whether it is viable not at, say, a 27% tax rate, but rather at a 58% tax rate. The risk of cancellation is enormous.

One of the points on which the Henry Review is based is that a distinction should be drawn between mobile assets and immobile assets, with the view stated that taxation should focus on immobile assets. Incredibly, what seems to be overlooked in the case of the RSPT is that although a deposit of say copper may in fact be immobile, what is mobile is the capital which supports the exploitation of that deposit. Tax the profits at a higher level and you encourage capital flight.

Australia is not the only country in the world with mineral deposits. The large miners have a suite of projects the world over which can clearly be ranked in terms of relative attractiveness. Reducing the attractiveness of Australian minerals will increase attractiveness of overseas deposits - the consequences of this are obvious and the stakes are high. They are high not only for the miners but for this country as a whole. They are high for investors and non-investors through the prospect of job losses and national wealth destruction.

Peter Reed